Category: Registration/Licensing

The SEC has just published additional guidance for those venture capital funds advisers relying on an exemption to not register as investment advisers under the Investment Advisers Act of 1940, and who may worry that the way they structured a fund (or whether certain actions discussed below) might jeopardize the ability to rely on the exemption. In response to such inquiries, the SEC’s Division of Investment Management has provided additional guidance in the form of five examples or “scenarios” for advisers relying on the “venture capital fund” exemption or “VC Exemption” where they advise one or more venture capital funds. First, some background:

As they were required to do under the Dodd-Frank Act, the SEC announced that it has now voted to adopt permanent rules requiring municipal advisors to register. Previously, and immediately after Dodd-Frank, municipal advisors were placed under a temporary registration requirement, and following it, more than 1,100 municipal advisors registered with the SEC.

The permanent rule, the SEC says, will address the long concern about the fallout from losses suffered, in part, by municipalities purchasing complex derivatives products and relying on the advice from unregulated advisors — advisors, who municipalities may not have been aware, may have had conflicts of interest. In addition to defining the term “municipal advisor,” and who is exempted from that definition, the rule identifies when a person is considered to be providing “advice.” For example, the SEC says, other than general giving information, a person recommending to a municipal entity advice based on a particular need related to municipal financial products or related to the muncipalities’ issuance of municipal securities would be considered providing muncipal advice.

The SEC’s Press Release states that the new rules will be effective 60 days after publication in the Federal Register.

A reminder to advisers, the code of ethics you adopted probably requires quarterly reports to be prepared for all personal securities transactions made by access persons. If it doesn’t there are two possible reasons (1) chances are you haven’t read it, or (2) you don’t have one — in which case you need to first read Rule 204A-1 of the Investment Advisers Act of 1940.

The Timing of Transaction Reports

Under Rule 204A-1(b)(2), these reports are due no later than 30 days after the close of the calendar quarter. Access persons who would be submitting duplicate information contained in trade confirmations or account statements that an adviser holds in its records (provided the adviser has received those confirmations or statements not later than 30 days after the close of the calendar quarter in which the transaction takes place) may be excused by their investment advisers from submitting transaction reports.

Who is an access person?

Rule 204A-1(e)(1) defines an access person as a supervised person who has access to nonpublic information regarding clients’ purchase or sale of securities, is involved in making securities recommendations to clients or who has access to such recommendations that are nonpublic. Further, a supervised person who has access to nonpublic information regarding the portfolio holdings of affiliated mutual funds is also an access person, but only to the extent they make, participate in, or obtain information regarding, the purchase and sale of the fund’s securities, or if their functions relate to the making of any recommendations for such transactions.

(ii) administrative, technical, and clerical personnel if their functions or duties give them access to nonpublic information;

(iii) organizations where employees may have broad responsibilities, and fewer information barriers are in place to prevent access to nonpublic information. On the other hand, as the SEC has noted, organizations that keep strict controls on sensitive information may have fewer access persons; and

(iv) presumably if the firm’s primary business is providing investment advice, then all of its directors, officers and partners would be access persons.

When must access persons report personal securities transactions?

Under Rule 204A-1(b), each of an adviser’s access persons must report his securities holdings at the time that the person becomes an access person and at least once annually thereafter. Further, they must make to the adviser’s Chief Compliance Officer or other designated person a report at least once quarterly of all personal securities transactions in reportable securities.

What are “reportable securities”?

Rule 204A-1 treats all securities as reportable securities, but list five exceptions designed to exclude securities that appear to present little opportunity for the type of improper trading that the access person reports are designed to uncover. These include transactions and holdings in:

shares of other types of mutual funds, unless the adviser or a control affiliate acts as the investment adviser or principal underwriter for the fund.

units of a unit investment trust if the unit investment trust is invested exclusively in unaffiliated mutual funds.

There are other exceptions. For example, under Rule 204A-1, no reports are required for transactions effected under an automatic investment plan; No reports are required for securities held in accounts over which the access person has no direct or indirect influence or control; and finally, under Rule 204A-1(d), no report is required in the case of an advisory firm that has only one access person, so long as the firm maintains records of the holdings and transactions that rule 204A-1 would otherwise require be reported.

There are other requirements in Rule 204A-1, the Code of Ethics Rule, covering access persons transactions and holdings that advisers should review. These includes such issues as pre-approval of certain investments, review of personal holdings and transaction reports, procedures to address personal trading and reporting of violations.

In Regulatory Notice 12-46, FINRA has announced the start of the 2013 Renewal Program for investment advisers, broker-dealers, their agents and investment adviser representatives. On November 12, 2012, FINRA will make the online Preliminary Renewal Statements available to all firms on Web CRD/IARD. The following dates are key in the renewal process:

November 12, 2012 Preliminary Renewal Statements are available on Web CRD/IARD.

December 13, 2012 Full payment of Preliminary Renewal Statements is due.

January 2, 2013 Final Renewal Statements are available on Web CRD/IARD.

February 1, 2013 Full payment of Final Renewal Statements is due.

Firms can find guidance in the renewal instructions, the Renewal Program Bulletin, and the IARD Renewal Program Bulletin (if applicable) on the Investment Adviser Registration Depository (IARD) website.

FINRA warns firms that failure to remit full payment of their Preliminary Renewal Statements to FINRA by December 13, 2012, may cause the firm to become ineligible to do business in the jurisdictions where it is registered, and subject them to late fees effective January 1, 2013.

The Board of Directors of Certified Financial Planner Board of Standards, Inc. (CFP Board) has announced, effective August 27, 2012, the adoption and implementation of new Sanction Guidelines.

Typically, the CFP Board’s enforcement process involves them investigating incidents of alleged unethical behavior using procedures established by the CFP Board’s Disciplinary Rules and Procedures. When violations are found, the CFP Board can impose discipline ranging from a private letter of censure or public admonition to suspension or revocation of the right to use the CFP® mark.

In the past, the differences in punishment meted out for those violating CFP’s rules haven’t always represented a model of consistency. Presumably, the new guidelines will assist the Disciplinary and Ethics Commission (DEC), the group that conducts disciplinary hearings under the CFP Board’s rules, in doing just that. Similar to FINRA’s approach, the CFP Board’s sanction guidelines includes a chart featuring recommended sanctions for violations that cover everything from bankruptcy, to borrowing money from a client to unauthorized use of the CFP® mark. The chart also includes a column or category entitled “Policy Notes” or factors that the DEC, and if appealed, may also be used by the Appeals Committee of the Board of Directors which considers appeals of DEC decisions.

Does the CFP Board’s recent creation of the position and appointment of a new director of investigations create yet another level of securities enforcement scrutiny for financial planners? On the surface, it sure looks like it.

A recent Advisor One article entitled “CFP Board’s Keller Says New ‘Top Cop” Will Beef Up Investigations” quotes CFP Board CEO Kevin Keller stating that the reason for the position was not because of an increase in the number of compliance cases or violations of CFP rules but to “to build our capacity to achieve our mission of benefiting the public.”

Translation. What this means is that given its membership growth expect number of enforcement cases to rise. More recently, the Board’s enforcement efforts have focused on bringing cases against members who have had bankruptcies or who have disclosures in FINRA or SEC matters that involve claims of misrepresentation or fraud. Also, the number of cases the CFP Board opened in 2011 (1,569 cases) increased from the 1,472 cases opened in 2010. Although most CFP investigations do not result in enforcement actions, expect a continued increase in the number of investigations with the new appointment.

This blog identifies and discusses new and developing regulatory issues that impact investment advisers, broker-dealers, corporations and individuals who either work in the securities industry or who are impacted by its regulations.